The Federal Reserve kept short-term interest rates unchanged in their latest policy announcement yesterday. However, they made some statements about their mortgage-backed securities (MBS) purchases that could affect mortgage rates. Bottom line: If you see a rate you like and you’re ready, it’s a great time to take advantage and apply now.
My analysis is in bold.
The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
The Fed has gone out of its way every time it makes one of these announcements since COVID-19 started to reiterate its intent to use every tool at its disposal to support the continued economic recovery.
With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
Given the rollout of vaccines and continued policy support, as well as the fiscal support of other areas of government, there are really good indicators that the economy has steadily picked up steam. Inflation is all anyone’s talking about, and the Federal Reserve isn’t living under a rock.
However, the Committee continues to say that inflation is transitory, meaning that it should slow as supply chains get back to normal when there’s not such a run on goods and services now that people are slowly returning to life outside their houses. This is also a little bit deceiving because there was less demand for quite a while starting last March.
The path of the economy continues to depend on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.
The virus continues to dictate policy and just generally run the show. We certainly aren’t out of the woods yet and it’s good to look at this paragraph is an acknowledgment of that. If things change, the Federal Reserve is committed to updating policy with those changes.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
There’s so much happening in this paragraph that the massive block of text is nearly overwhelming. Not that Chairman Powell needs my writing advice, but three to five lines of text per paragraph is a good goal. OK, you came for economic analysis, not my writing soapbox. Let’s break this down.
First, the goals of the Fed are summarized. The committee would like to keep long-term inflation around 2% annually. Because inflation has been so low for so long, they’re actually OK with it running above 2% for a while. Right now, it’s running well above that level, but the Fed sees this coming back down over time.
Given this market, the Committee has chosen to keep short-term interest rates right where they are, in a range between 0% – 0.25%. Short-term interest rates have the biggest immediate impact on revolving debt like credit cards, but it also affects longer-term rates for things like mortgages. Basically, the lower the better.
One thing the Federal Reserve has been doing since December is buying $40 million worth of treasuries and $80 billion worth of MBS. This makes the Fed the biggest player in the MBS market.
MBS trading has a direct impact on mortgage interest rates. Essentially, when there are plenty of buyers in the securities, rates can be lower because the yield doesn’t have to be as high to attract a buyer. If buyers move money into higher yield, more risky investments like stocks, MBS yields and rates have to rise to attract a buyer.
We’re in a situation where the Fed is buying such a volume of MBS that this alone helps lower mortgage rates. If the Fed exits without a big buyer or buyers to pick up the slack, it’s possible that rates push up.
This is the first time the Committee has mentioned assessing progress and reevaluating this policy. No one but the Fed knows its timeline at this point, but if you’re on the fence about purchasing or refinancing and like the interest rate you see, it’s a great time to act. No one can predict the future.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Here the Fed just talks about what they base their decisions on. In addition to inflation being mentioned twice, public health is a paramount concern at this point. It’s always good to know they consider a wide range of data.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.
Committee members were in agreement.
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